Jean Christou
THE Central Bank yesterday lifted all restrictions on lending for investment, ten months after they were brought in to curb an uncontrolled flood of borrowing to play the stock market.
Investors and brokers heaved a sigh of relief after Central Bank Governor Afxentis Afxentiou announced the decision. But Afxentiou followed up the announcement with a warning that commercial banks and co-ops must use caution on handing out new loans for investment.
"The measures taken in 1999, with which loans given for investment in the stock exchange were prohibited, were completely justified at the time, considering the circumstances," Afxentiou said.
No, he said, things have changed. "Other conditions are prevailing today and we decided to lift the restrictions. As a result, banks and co-ops can – with moderation and caution — conduct such transactions always within their credit limits." He added: "We could not remain apathetic as the Cyprus Stock Exchange was collapsing."
The Central Bank’s decision is designed to help ease the market’s current liquidity squeeze which was partly a result of last year’s restrictions. With no new cash flow, small investors were locked into the market at the same time as institutional investors appeared to be sitting on the fence.
A freefall in share prices in recent weeks sent investors into a panic and left many dumping stocks at any price in order repay existing debts. Fears of a market crash were almost realised this week when the index hit a 15-month low and small investors stormed the stock exchange building on Wednesday clamouring for state intervention.
The same day the index ended in the black after last-minute bargain buying by big investors who have been holding on to some £300 million.
Although some confidence was restored in the bourse by Thursday after a significant 7.7 per cent gain, followed by a 0.44 per cent increase yesterday, volumes have remained low indicating that cash-strapped small investors are hanging on to their stocks, leaving no room for new investments.
"It was imperative that they relax the restrictions," said broker Stephanos Hailis. "This should help a lot. It was one of the principal reasons for the market’s liquidity squeeze."
Andreas Theophanous, Director of Intercollege’s Research and Development Unit, agreed that the Central Bank’s move might help ease the problem. "But at the end of the day we have got to learn that the stock market results should be an outcome of economic indicators," he said.
He said the move is understandable in that the market has reached a new stage in its development and he believes the Central Bank does not intend it to be indefinite. "The market is in a transitionary period and we can play around with it, but five years from now we expect it to work on a more mature basis," he said.
Theophanous also believes there is unlikely to be a huge rush for loans. "People are wiser than they were last year and are making more calculated decisions," he said. ‘Even the people involved didn’t know all the rules of the game and there was no adequate legal framework."
(Opinion: page four)
